World cocoa prices fell by about 20% in two days, it was reported on Tuesday, as technical triggers prevailed thanks to record-low liquidity.
Prices recovered later on Tuesday evening.
Prior to the slump, cocoa futures traded on the ICE exchange – which is used as a benchmark to price the cocoa bean – had nearly tripled in value this year due to adverse weather and disease in the Ivory Coast and Ghana.
The ascent left many physical market players out of pocket, dealers said.
This left the market in the hands of algorithmic day trading funds programmed to follow similar technical signals.
In the absence of liquidity, these funds exaggerate price swings on both the upside and the downside.
‘Move The Market Disproportionately’
The head of agricultural sales at Marex Jonathan Parkman said, “Is there a concrete bit of news that drove the market here? No.
“The New York position is tiny, a record low in modern times.
“The lack of liquidity is going to move the market disproportionately in both directions.”
July London cocoa future on the ICE exchange fell nearly 15% on Monday for their largest one-day loss.
They fell a further 10% at the market open on Tuesday.
They settled at 3.3% at the close, with July New York cocoa futures rose 3.9%, having lost nearly 16% on Monday.
Crop Prospects
The market is laser-focused on the crop development in the Ivory Coast and Ghana, which will become clearer in the next two months, alerting investors as to whether a recovery is possible next season.
Together, the two countries produce nearly 60% of the world’s cocoa.
With their crop prospects uncertain for now, there are no new fundamental factors driving prices and supplies remain tight.
Monday’s price slump followed moves by the ICE exchange to increase initial margins on cocoa futures, ING Bank noted.
The increases are likely to trigger another reduction in liquidity.
ING Bank said, “The higher margins and volatility in cocoa have led to open interest declining from around 400,000 lots in November to around 243,000 lots currently.”
In other soft commodities, May raw sugar lost 2.4% at 19.71 cents per round.
August white sugar fell 0.8% at $569.30 a tonne.
Read More: Cocoa Harvesting In Ivory Coast To Pick Up From May
